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Fair Value | 9 Months Ended
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Sep. 30, 2019
Fair Value Disclosures [Abstract] |
Fair Value | Fair Value GAAP assigns a fair value hierarchy to the inputs used to measure fair value. Level 1 inputs are quoted prices in active markets for identical assets and liabilities. Level 2 inputs are inputs other than quoted market prices that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs. Financial Instruments The estimated fair values of our Senior Notes as of September 30, 2019 and December 31, 2018 were $625,500 and $594,000, respectively. The estimated fair value is based on recent market prices of similar transactions, which is classified as Level 2 within the fair value hierarchy. The carrying values at September 30, 2019 and December 31, 2018 were $598,146 and $597,681, respectively. Except as otherwise noted below, we believe that insignificant differences exist between the carrying value and the fair value of our financial instruments, which consist primarily of cash equivalents, due to their short term nature. Derivative Instruments and Mortgage Loans Held for Sale In the normal course of business, our wholly-owned mortgage subsidiary, NVR Mortgage Finance, Inc. (“NVRM”), enters into contractual commitments to extend credit to our homebuyers with fixed expiration dates. The commitments become effective when the borrowers "lock-in" a specified interest rate within time frames established by NVRM. All mortgagors are evaluated for credit worthiness prior to the extension of the commitment. Market risk arises if interest rates move adversely between the time of the "lock-in" of rates by the borrower and the sale date of the loan to a broker/dealer. To mitigate the effect of the interest rate risk inherent in providing rate lock commitments to borrowers, NVRM enters into optional or mandatory delivery forward sale contracts to sell whole loans and mortgage-backed securities to broker/dealers. The forward sales contracts lock in an interest rate and price for the sale of loans similar to the specific rate lock commitments. NVRM does not engage in speculative or trading derivative activities. Both the rate lock commitments to borrowers and the forward sale contracts to broker/dealers are undesignated derivatives and, accordingly, are marked to fair value through earnings. At September 30, 2019, there were contractual commitments to extend credit to borrowers aggregating $827,120 and open forward delivery contracts aggregating $1,101,965, which hedge both the rate lock loan commitments and closed loans held for sale. The fair value of NVRM’s rate lock commitments to borrowers and the related input levels include, as applicable:
i) | the assumed gain/loss of the expected resultant loan sale (Level 2);
ii) | the effects of interest rate movements between the date of the rate lock and the balance sheet date (Level 2); and
iii) | the value of the servicing rights associated with the loan (Level 2).
The assumed gain/loss considers the excess servicing to be received or buydown fees to be paid upon securitization of the loan. The excess servicing and buydown fees are calculated pursuant to contractual terms with investors. To calculate the effects of interest rate movements, NVRM utilizes applicable published mortgage-backed security prices, and multiplies the price movement between the rate lock date and the balance sheet date by the notional loan commitment amount. NVRM sells all of its loans on a servicing released basis, and receives a servicing released premium upon sale. Thus, the value of the servicing rights is included in the fair value measurement and is based upon contractual terms with investors and varies depending on the loan type. NVRM assumes a fallout rate when measuring the fair value of rate lock commitments. Fallout is defined as locked loan commitments for which NVRM does not close a mortgage loan and is based on historical experience. The fair value of NVRM’s forward sales contracts to broker/dealers solely considers the market price movement of the same type of security between the trade date and the balance sheet date (Level 2). The market price changes are multiplied by the notional amount of the forward sales contracts to measure the fair value. Mortgage loans held for sale are recorded at fair value when closed, and thereafter are carried at the lower of cost or fair value, net of deferred origination costs, until sold. Fair value is measured using Level 2 inputs. The fair value of loans held for sale of $411,223 included on the accompanying condensed consolidated balance sheet has been increased by $7,051 from the aggregate principal balance of $404,172. As of December 31, 2018, the fair value of loans held for sale of $458,324 were increased by $10,880 from the aggregate principal balance of $447,444. The fair value measurement of NVRM's undesignated derivative instruments was as follows:
|  | September 30, 2019 |  | December 31, 2018
Rate lock commitments: |  |  |  |
Gross assets |  | $ | 12,427 |  |  | $ | 13,831 |
Gross liabilities |  | 959 |  |  | 345 |
Net rate lock commitments |  | $ | 11,468 |  |  | $ | 13,486 |
Forward sales contracts: |  |  |  |
Gross assets |  | $ | 1,519 |  |  | $ | 64 |
Gross liabilities |  | 2,887 |  |  | 10,121 |
Net forward sales contracts |  | $ | (1,368 | ) |  | $ | (10,057 | )
As of both September 30, 2019 and December 31, 2018, the net rate lock commitments are reported in mortgage banking "Other assets" and the net forward sales contracts are reported in mortgage banking "Accrued expenses and other liabilities" on the accompanying condensed consolidated balance sheets. The fair value measurement adjustment as of September 30, 2019 was as follows:
|  | Notional or Principal Amount |  | Assumed Gain/(Loss) From Loan Sale |  | Interest Rate Movement Effect |  | Servicing Rights Value |  | Security Price Change |  | Total Fair Value Measurement Gain/(Loss)
Rate lock commitments |  | $ | 827,120 |  |  | $ | 2,071 |  |  | $ | 1,239 |  |  | $ | 8,158 |  |  | $ | — |  |  | $ | 11,468 |
Forward sales contracts |  | $ | 1,101,965 |  |  | — |  |  | — |  |  | — |  |  | (1,368 | ) |  | (1,368 | )
Mortgages held for sale |  | $ | 404,172 |  |  | 1,517 |  |  | 798 |  |  | 4,736 |  |  | — |  |  | 7,051 |
Total fair value measurement |  |  |  | $ | 3,588 |  |  | $ | 2,037 |  |  | $ | 12,894 |  |  | $ | (1,368 | ) |  | $ | 17,151 |
The total fair value measurement adjustment as of December 31, 2018 was $14,309. NVRM recorded a fair value adjustment to expense of $8,711 for the three months ended September 30, 2019, and recorded a fair value adjustment to income of $2,842 for the nine months ended September 30, 2019. NVRM recorded a fair value adjustment to expense of $1,986 for the three months ended September 30, 2018, and recorded a fair value adjustment to income of $7,613 for the nine months ended September 30, 2018. Unrealized gains/losses from the change in the fair value measurements are included in earnings as a component of mortgage banking fees in the accompanying condensed consolidated statements of income. The fair value measurement will be impacted in the future by the change in the value of the servicing rights, interest rate movements, security price fluctuations, and the volume and product mix of NVRM’s closed loans and locked loan commitments.

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- Definition The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information. + References Reference 1: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=117815213&loc=d3e19207-110258 + Details
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